Use it, or Lose it

When I first learned of the Social Innovation Fund (SIF) a few years ago, I thought it was a great way to generate innovative ideas and create an environment for sharing that knowledge. After reading several articles this week about the SIF, I realized it is not nearly as effective as it could be. Some of the big points mentioned in the reading are around measuring impact, oversight, and the distribution of funds. Where the SIF really struggles though, is the fact that its funding is part of the federal budget and the funds must be used. While it may not be obvious, this is a serious hindrance to social innovation. To explain this, I’ll go to a couple of personal experiences I’ve had with budgets. When I worked in the private sector, my company used budgeting to allocate funds to different groups. This method is normal for companies who understand how much money each unit spends/requires each year. Where this becomes an issue is when a group doesn’t spend all of their funding for the year. To an outsider, this would seem like a good thing because the company is spending less money. In reality, it’s bad for the business unit because the company will most likely reduce future funding. In my company, this led to business units spending money on non-essential tasks in order to rationalize funding for the following year.

In a similar example, where I grew up, the state allocated funds to cities for “community beautification.” While the idea of cleaning up cities is important, the way the state dispersed funds led to ridiculous “improvement projects” in our city. Instead of giving the funds to cities who needed it the most, every city received “$X” to spend, which led to the addition of new signs where they weren’t needed, and features like waterfalls and fountains in already thriving communities. The reason this happened was due to the “use it, or lose it” mentality where cities would lose that budgeted money if they didn’t spend it.

This “use it, or lose it” policy is a common philosophy among organizations/governments, but it leads to obvious inefficiencies. For the intermediaries who receive funding from SIF, this philosophy encourages them to spend all of their funding in order to receive more. However, this means the money is only going to projects the intermediaries have access to, not necessarily the most innovative projects with the greatest value to society. Instead of funding these intermediary organizations, the government would be better off funding prize-style competitions, like those described by Tina Rosenberg.  Humans are naturally competitive, so creating competitions for innovation provides an environment where individuals/companies/organizations are encouraged to produce the best/most innovative solution to a problem. Even though this means less people may receive funding, only the truly innovative and highest potential ideas are funded, which is ultimately better for society as a whole.

What do you think – is it better to fund many organizations to produce innovative ideas, or is it better to create competition and focus funding on “winners?”